Boeing Co. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited; the interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $24.755B | $24.543B | $47.387B | $46.692B |
| Operating earnings/(loss) | ($419M) | $1.683B | $1.369B | $3.702B |
| Operating margin | (1.7%) | 6.9% | 2.9% | 7.9% |
| Net earnings/(loss) | ($234M) | $1.110B | $985M | $2.446B |
| Diluted EPS | ($0.37) | $1.59 | $1.51 | $3.46 |
| Operating cash flow | Not separately stated | Not separately stated | $4.465B | $3.385B |
Q2 revenue increased 0.9% year over year, but operating results swung to a loss. First-half revenue rose 1.5%, while operating earnings and net earnings fell substantially. Cost of sales was 90.2% of revenue in Q2 versus 87.0% a year earlier; first-half cost of sales was 87.4% versus 85.3%. Boeing reported non-GAAP core operating loss of $488M and core loss per share of $0.44 for Q2, and first-half core operating earnings of $1.206B and core EPS of $1.35. Core measures exclude certain pension and postretirement costs.
Financial position and liquidity
- At June 30, cash and cash equivalents were $8.605B, down from $11.302B at year-end 2015. Current assets were $63.507B and current liabilities $49.859B.
- Recorded debt was approximately $11.0B, including $1.2B short-term; long-term debt was $9.847B. Boeing issued $1.2B of senior notes in May. It reported $5.0B of unused revolving credit capacity and no commercial-paper borrowings outstanding.
- First-half cash flow from operations was $4.465B; investing used $1.350B and financing used $5.809B. Cash declined $2.697B, principally amid share repurchases and dividends.
- Boeing repurchased $5.501B of shares and paid $1.408B of dividends in the first half. Shareholders’ equity fell to $585M from $6.335B at December 31, 2015; total equity was $647M.
- Total contractual backlog was $462.990B, down from $476.595B at year-end, primarily because deliveries exceeded net orders.
Segments and material changes
- Commercial Airplanes: First-half revenue was $31.855B versus $32.258B; operating earnings fell to $60M from $2.823B. Q2 revenue grew to $17.456B, but the segment recorded a $973M operating loss versus $1.206B earnings a year earlier. Results reflected a $1.188B Q2 747 reach-forward loss, $1.235B of 787 flight-test aircraft costs reclassified from inventory to R&D, higher 777X development spending, and KC-46A charges.
- Defense, Space & Security: First-half revenue rose to $15.130B from $14.253B and operating earnings to $1.415B from $1.289B. Q2 revenue was lower year over year, while operating earnings increased to $593M from $546M.
- Boeing Capital: First-half revenue was $148M versus $201M, and operating earnings $23M versus $31M. Its portfolio declined mainly due to run-off.
Outlook, risks and unusual items
- 747: Boeing abandoned plans to return to one aircraft per month in 2019, reduced the program accounting quantity from 1,574 to 1,555 aircraft, and expected to reduce production from one to 0.5 per month in September 2016. Weak demand and pricing pressure could prompt further losses or a production shutdown.
- KC-46A: Boeing recorded $816M of first-half reach-forward losses. First tanker delivery moved from March to August 2017; 18 operational aircraft were expected by January 2018. Boeing cited certification, schedule, hardware and change-incorporation challenges and warned of possible further losses.
- 787: Boeing said program gross margins remained near breakeven and identified productivity, supply-chain, production-rate and 787-10 introduction risks that could further pressure profitability. The $1.235B reclassification related to two flight-test aircraft deemed not commercially saleable.
- Other exposures: Environmental remediation liabilities were $590M; financing commitments totaled $17.132B, all for customers Boeing believed had below-investment-grade credit. Potential U.S. defense budget reductions, contract cost disallowances, Russia/Ukraine-related supplier or customer disruption, and aircraft financing availability were cited risks.
- Tax and accounting: Boeing expected to record approximately $180M in tax benefits in Q3 following completion of a federal tax review. Adoption of share-based payment accounting guidance increased first-half net earnings by $54M and diluted EPS by $0.08.
- Boeing’s July 2016 long-term commercial market forecast projected average annual passenger-traffic growth of 4.8% and cargo growth of 4.2%; it estimated demand for about 39,600 new airplanes over 20 years. These are market projections, not company financial guidance.
Investor verification points
- Assess the assumptions, cash implications and potential further charges for the 747, KC-46A and 787 programs.
- Verify the status of the KC-46A delivery milestones and Boeing’s ability to control certification and production costs.
- Review cash generation, liquidity and debt alongside continued buybacks and dividends; note the sharp reduction in reported equity.
- Track backlog conversion, net orders and customer financing needs, including the $17.132B of financing commitments.
- Evaluate contingent and disputed exposures, including environmental remediation, ULA indemnifications, tax matters and government contract cost reviews.